Winning Post: Hard lessons to be learnt in Kenya

Opening the week, industry strategic consultancy Regulus Partners offers its insight into some of the topics facing the gambling industry over this last week, including SportPesa’s decision to withdraw from Kenya, the closure of Towcester racecourse, and the privatisation of FDJ.

Kenya: taxation and regulation – hard lessons from a game over

Kenya’s tempestuous few years of gambling ‘reform’ has now apparently permanently driven out its erstwhile posterchild and market leader. SportPesa (until recently a c. €200m net revenue business, sponsor of Everton and Hull, F1 Racing Point team partner and official partner of Chester Racecourse) has stated that it is not going to seek to reapply for a licence as the government announced a further tax hike (an additional 10ppts to a 20% Excise Duty on stakes, voted through last week) – this is now much more than posturing, with the group laying off over 450 employees in Kenya (only two months after stating it would not be shut down or driven out of the country). Betin, another major market participant, has also reportedly given up and opted for closure and redundancy.

Kenya’s rise demonstrates the power of online betting in an emerging market where payments are not a problem – in this case due to M-Pesa (mobile money), a mass market solution to the banking crisis. The Kenyan betting sector reached reported stakes of over KS200bn in 2018, implying revenue – pre disruption – of c. €500m (including player winnings taxes collected by operators) – a very significant market given the country’s size (50m) and relative wealth (US$1.8k GPD per capita). In this context, understanding local connectivity and ecommerce provides a clear commercial guide to success. However, the issues that led to Kenya’s volte face on a once strong sector are even more instructive, in our view. We identify four key takeaways.

The most obvious issue – sometimes too obvious to notice – facing Kenya was the very rapid nature of the growth. This meant that the key operator (and others), regulator and government were constantly playing catch-up. While rapid growth might be highly attractive on some levels, it is too easy to ignore the systemic risks that are typically built up – especially for the operators enjoying the success (nobody welcomes a voice of caution within a business until it is too late, especially in ‘entrepreneurial’ cultures). Equally, while there was ample evidence that the government did not fully think through its fiscal or social policies when applied to the burgeoning betting sector, this is only to be expected under rapid growth circumstances. The minute the understanding and expectations of the government and regulator diverged from the operators, risk was created – a risk stoked by an increasingly confrontational attitude. Preventing or bridging this gap can be extremely tough – but the failure to do so can be much more painful.

Aggressive marketing goes hand in hand with rapid online-led growth. In an environment where gaming is limited or landbased, marketing too tends to be niche and so broadly out of sight for those not looking for it. Conversely, online gambling tends to want to be as mass market as possible, with a full panoply of advertising and sponsorship to drive this. Gambling operators should always bear in mind that even when commercial online gambling reaches truly mass market status (c. over 10% of adult participation), that still leaves 80-90% of adults either uninterested or anti- and big concerns for children and vulnerable groups. Gambling will never be an FMCG or insurance – marketing it as if it has mass acceptance is likely to create the opposite effect – in Kenya and elsewhere.

The rise of online betting in Kenya was creating visible problems, in terms of youth participation and personal debt. While these issues may be complex and the gambling sector may not have been as contributory (to the latter) as was sometimes portrayed, it is hard to shake of the criticism that the Kenyan gambling sector was more about growth than responsibility.

The combination of aggressive marketing and social concerns made the sector an easy fiscal-regulatory target. This was probably exacerbated in SportPesa’s case by a high degree of foreign ownership (an understandable bugbear of many emerging market countries that struggle with investment inflows) and perhaps a belated sense that mobilising community support could mitigate this.

There has been a tendency among some operators and suppliers to see emerging markets as the growth solution to maturing Western markets. On a secular and operational level, there is undoubtedly much merit in this, as Kenya until recently helped to demonstrate. However, at least one emerging market has demonstrated that it is not scared to take on and drive out one of its biggest taxpayer companies as social (and other) concerns mounted and the issues got politicised. The tobacco sector has given gambling plenty of warning that treating emerging markets principally as a source of growth and cash can go wrong at the regulatory layer. Kenya should teach gambling operators that growing an emerging market presence needs to be done sensitively if it is to be sustainable. In this context, the .com playbook can be left offshore…


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